On Our Radar

Junior Isn’t Driving and Millennials Aren't Buying, What Gives?

You can blame the economy, social media, the labor market or new laws, but one thing is clear: young drivers aren’t flocking to the car market.

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“The financial crisis hit the younger generations the hardest and now a lot of these people don’t have the financial wherewithal to get credit to get a car,” says Lacey Plache, chief economist for Edmunds.com. “They don’t have jobs or an apartment, so right now, many of them don’t have the need for a car.”

The improving economy has nudged more consumers into the auto market, but experts say Millennial and teenage drivers have remained on the sidelines.

In 2013, new car and truck sales in the U.S. weighed in at 15.6 million, according to Autodata, a 9.2% increase from 2012 and the highest level since 2007.

But the faces behind the new wheels aren’t young ones.

From 2007 to 2011, the number of cars purchased by Millennials, those age 18 to 34, fell almost 30%, according to Plache. And according to a study from the AAA Foundation for Traffic Safety, 44% of teens obtain a driver’s license within the first year of becoming eligible and 54% are licensed before turning 18.

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Of course, younger drivers are not the most important age demographic to the auto industry.

“They are still not as important to the older generations of baby boomers and those older than 55 that have more disposable income,” says Karl Brauer, senior analyst at Kelley Blue Book. “But every day, Millennials are becoming more important and more critical to current and future car sales. They are a large demographic.”

As carmakers struggle to create cars that will appeal to the technology-obsessed demographic, the insurance industry could also feel the pinch.

“The longer someone stays with us the better,” says Steve Sorenson, executive vice president, product operations, for Allstate Insurance. “The longer we have them, the better they tend to perform and the more they will buy from us. We want to establish and sustain customers as early as possible.”

Sorenson has three licensed teens at home, but admits it was only at his and his wife’s motivation. “We really had to push them to get licensed, it was more for our own freedom of not having to drive them everywhere.”

The question of whether the delay of getting a new set of wheels is economic or preference remains to be seen, but it’s a question many want answered soon.

“Everyone in the industry and supporting it are watching very closely whether this is a temporary shift of not getting a license until 20 and not buying a car until even later or if this is a permanent change,” says Brauer. “But every day they get to be more important.”

Millennials

The share of auto sales to Millennials rallied in 2012, bringing 13% year-over-year growth to auto sales from that previous 30% drop. But the recovery was short lived.

“The employment growth that 2012 brought for this age group came to a halt in 2013 as college loan debt piled on. Plus, the wealth in 2013 came from the housing market and stock market, not areas young people tend to be involved with,” Plache says.

The cost of owning a car goes far beyond the window sticker price. According to AAA, drivers should expect to pay $9,122 a year to own and operate a sedan.

Scot Hall, executive vice president of operations at Swapalease.com, points out that many young adults are saddled with college debt that’s the size of an auto loan payment, making it hard for them to afford an actual car payment.

“For many lenders they look at the debt-to-income ratio of this age group and most of them barely have enough to cover their basic needs, let alone have money left over for extras like a car.”

Some also blame the lack of household formation among Millennials as a reason they aren’t signing auto deals. “They are still living with mom and dad or with a lot of roommates, so borrowing a car is still easy,” says Plache. “It’s when they move out and they lose that convenience that pushes them to getting their own car.”

A shift in priorities and lifestyle has also delayed the four-wheel purchase. “Technology has to play a prominent role in a car along with efficiency and (environmental) cleanness,” says Brauer. “This young generation isn’t as interested in the sportiness of car, they want something that burns cleaner.”

While this age group has historically only made up about 10-12% of the auto market, according to Plache, they are still important to automakers. “The Millennial generation is large and they have a massive future buying potential. Car makers want to get the buyers when they are young and lock them in because there tends to be a lot of brand loyalty with cars.”

The industry seems to be taking note about the technology requirements that have to be present in their products if they want to stand a chance at gaining Millennials’ attention. In fact, a main theme at this year’s Consumer Electronics show is always-connected cars.

Teens

Teens are increasingly celebrating their 16th birthday without standing in line at their local DMV.

“The increase of social media activity makes it less necessary for teens to get into a car to hang out and talk,” says Brauer. “They can now see their friends on their phone and computer screens.”

Plache adds that job openings for teens have plummeted since the financial crisis and have yet to recover, eliminating the necessity for some teens to get a license.

“Teens used to get their license so they could drive to work, but now that impetus has been removed,” Plache said.

Affordability also comes into the decision to start driving; with no job, fewer teens can afford getting their license and driving around town, and their parents might not be as financially comfortable as they were in the past to help them out.

“The economy has really shifted the mindset and affordability of driving,” says Plache. “But it’s too soon to conclude whether the shift is here to stay and is because of a lack of interest among younger drivers, or is purely budget driven and will rebound as the economy continues to recover.”